In most states, foreclosed properties have to go to sheriff sale where they are auctioned off with the proceeds going to pay off the first position mortgage and any other liens. This is the only way to erase all the claims against the property and clear the title. In most cases, the first mortgage holder (i.e., the bank) is the only bidder and essentially is buying the property from itself, since they are in the first position to be paid from the sale proceeds, with any funds in excess of the first mortgage being used to pay off the second mortgage and any property liens.

I say this because in order for the foreclosure to be completed and recorded. the winning bidder (ie., the first mortgage holder/bank) has to pay all the necessary sheriff's fees to have the transaction recorded. What many banks are doing is going through the sheriff sale to wipe out al the other claims and wrest control of the property from the mortgagee, but they aren't paying the sheriff's fees until they are ready to sell it or can get the foreclosed on mortgagee to pay them. In this scenario, the property is not legally considered a foreclosure. hence it is part of the bank's "shadow inventory", and there are A LOT of homes that are in this category, because their book value would be far less than the first mortgage triggering a loss on the bank's books.
the bank has to buy the property with the proceeds Learned from a bank executive that a foreclosure doesn't get recorded until the bank takes title, which involves

9:43 am October 18, 2013

MegaCynic wrote:

Mortgage lenders (banks, the GSE' and other mortgage investors) do not have to recognize their loss on a mortgage until the collateral (the house) is sold or the mortgage contract is modified. It seems, in many cases, these large institutional holders of mortgage notes would prefer to 'manage' the timing of their liquidation of their shadow inventory of defaulted homes and off-set their losses against revenue from other investments and fees over time. [On YouTube do a key words search for Georgetown law Professor Adam Levitin Regulators Don't Want To Know].

The problem of land title and mortgage note ownership records becaming lost in the Mortgage Electronic Registration System (MERS) which led to the robo-signing of mortgage file data and foreclosure related affidavits has also slowed down mortgage note owners ability to foreclose on seriously delinquent borrowers. And, new laws designed to aid defaulted borrowers and provide opportunities to cure defaults (like Nevada's Assembly Bill 284) have also slowed down the foreclosure process.

It's interesting, it seems mortgage note owners would rather have the defaulted borrower stay in the property and delay foreclosing because (1) the occupied house is less likely to be vandalized and 'stripped' of valuable. (2) As long as the mortgage is still in the borrowers name the borrower is the one liable for property taxes, munipal fees and HOA fees (if any). While the original borrower is in the house the neighbors are less likely to complain about the condition of the house and it's negative effect on neighborhood property values. The benefits of having a defaulted borrower stay in the property have given rise to the phenomenon of "mortgage squatters". And, in some cases it seems the squatters are not the borrowers.

And:
Testimony Before the United States Senate Committee on Appropriations Subcommittee on Transportation, Housing and Urban Development and Related Agencies An Overview of the Federal Housing Administration Testimony of The Honorable David A. Montoya Inspector General Office of Inspector General U.S. Department of Housing and Urban Development, June 4, 2013

10:37 am October 18, 2013

Buy-to-Rent wrote:

For the past couple of years a significant proportion of the shadow inventory has been snapped-up by institutional investors and private equity funds which believed they can buy distressed and foreclosed homes, rehabilitate and remodel them, manage the properties and rent them at a profit. In many instances these institutions bought single family homes "in bulk" from banks and the GSE's.

It appears that this source of demand for single family homes has significantly abated. The increase in the price of homes which was, in part, caused by these institution's eagerness to buy single family homes has made the rent-to-buy strategy less economically practical then it was when homes were significantly cheaper. And, it appears the buy-to-rent strategy is encountering some of the problems that critics of the predicted it would encounter at its outset. Key words search: institutional buy-to-rent

1:12 pm April 20, 2014

Observer wrote:

The comments are more informative than the original post.

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